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Oct 3: Market Begins to Feel Shutdown Effect

Stocks were up on Tuesday as the government shutdown got underway, but were down modestly on the second day of the shutdown on Wednesday. The Washington impasse has carried into the third day and stocks are indicated lower at the pre-open today. Hard to tell how much the budget issue is at play in moving the market, but it’s perhaps reasonable to assume that it is at least playing some negative role on the margin.

Economic data could explain part, if not all, of the market reaction, if the shutdown issue is insufficient. After all, we had a strong read on the nation’s factory sector through the manufacturing ISM index on Tuesday, while the labor market report from ADP on Wednesday didn’t make the grade.

The weekly Jobless Claims data this morning was good enough, but the key economic read today is the service sector ISM index coming out a little later. The service sector index reached a multi-year high last month and another strong reading along the lines of what we saw from the manufacturing index on Tuesday would brighten the economic outlook.

Improving economic outlook is good, but it has implications for the Fed’s QE program. The Fed held off on starting the Taper last month, but the delay is likely only temporary and the Taper talk will resume once we are past the ongoing Washington impasse.

We don’t have the non-farm payroll report this Friday because of the shutdown, there aren’t that many top-tier economic reports on the docket in the coming days and the Q3 earnings season wouldn’t ramp up for another two weeks. But we will get minutes of the Fed’s last meeting next Wednesday that gave us the surprising non-Taper decision. It will be interesting to see how close the call actually was as some of the Fed officials portrayed it in their public statements.

Bottom line, the market is looking at the Washington fight as nothing more than distracting noise at this stage while keeping its focus on the underlying economy. Let’s hope that it doesn’t become anything more than that.